Bank of Scotland was guilty of "very serious misconduct" which contributed to the taxpayer bailout of its parent company HBOS, the City watchdog said today.
The Financial Services Authority (FSA) said the corporate division took too many risks from the start of 2006, leaving it vulnerable to the financial downturn.
The FSA criticised the "aggressive deal structures" increasingly pursued by the bank and said it failed to reduce its risky behaviour despite expectations of a downturn in the markets.
Although this behaviour contributed to the taxpayer bailout of HBOS - and the eventual bailout of Lloyds, which bought HBOS - there will be no punishment as the FSA seeks to protect taxpayers' money.
Tracey McDermott, FSA acting director of enforcement, said: "The conduct of the Bank of Scotland illustrates how a failure to meet regulatory requirements can end not just in massive costs to a firm, but losses to shareholders, taxpayers and the economy.
"Banks and other firms have to manage their business by ensuring that their systems and controls are appropriate for the risks that they are running."
While the FSA's report marks the end of the watchdog's investigation into the firm, it is still possible that it could pursue action against individuals.
HBOS's corporate banking division was run by Peter Cummings - a friend of billionaire Topshop owner Sir Philip Green - who reportedly left with a £660,000 pay-off and a £6 million pension pot.
When Lloyds took over HBOS at the height of the banking crisis, it was forced to write off more than £20 billion.
The damning report adds that Bank of Scotland's corporate lending was aggressive and focused on high risk, sub-investment grade lending, which left it "highly vulnerable".
In the three years from the start of 2006, its transactions increased in size and complexity and left it with concentrated exposures to property and significant large borrowers.
The value of those deals worth more than £75 million nearly doubled from £56 billion to £96.2 billion between 2006 and 2007, the FSA said.
And it pressed ahead with trying to aggressively grow even when markets began to deteriorate in 2007, while its culture was "focused on revenue rather than assessing the level of risk in transactions".
A spokesman for Lloyds said the period under review was before it was taken over by Lloyds TSB.
He added: "This will help to draw a line under the events in question and allow the Group to move forward."